India power investment slows, chronic deficit worsens

MUMBAI Investments into India's power sector are slowing despite a chronic electricity shortage that threatens GDP growth, executives told the Reuters India Investment Summit, due to coal shortages, land hassles and an inability by distribution companies to raise tariffs.

The energy-hungry nation needs to add over 75,000 megawatts in the five years to March 2017 to support its target of 9 percent GDP growth, according to a government report. That will cost roughly 11 trillion rupees ($210 billion), with half the investment to come from the private sector. But investor appetite is weak.

"We are very worried about the power sector, for the simple reason that it is the catalyst for growth," R Shankar Raman, chief financial officer at engineering conglomerate Larsen & Toubro (LART.NS), said at the Summit.

"Unless we fix that, much of the other investments are not going to happen easily," he said. Larsen & Toubro last month slashed its overall order growth guidance for the current fiscal year by two-thirds to 5 percent, blaming slowing investments.

Firms struggle to get permission for land purchases and coal supplies from state and central authorities, while state-run distributors have ramped up debts due to their inability to raise low tariffs -- part of populist measures to provide cheap power to the poor.

India's peak power deficit in October stood at 13.1 percent, according to data from the Central Electricity Authority, up from 9.4 percent a year previously.

"The situation in the power sector has definitely worsened. At this point, fresh investments on a large scale are not happening," said Salil Garg, director at Fitch Ratings India.

"In the short term, there are several issues hindering investments, and it is also clear that financial health of state utilities, which are the main buyers, will not improve soon."

Planned projects have been put on hold and plants already under construction are also facing delays, Garg said.

A slew of corruption scandals has put the government on the back foot and slowed reforms. That has hurt business sentiment, already suffering due to high interest rates, soaring inflation and global economic woes that have muted demand.

India is likely to grow at around 7.6 percent in the financial year to March 2012 compared with 8.5 percent a year earlier, according to a Reuters poll.

"If there is a power shortage of 15 percent, it obviously represents lost economic activity for industry," said Kameswara Rao, executive director for government and infrastructure at PriceWaterhouseCoopers India.

"Certainly there is a serious implication in terms of GDP impact," he said.

RISING COSTS, LOW TARIFFS

Coal accounts for 55 percent of India's power generation capacity of 182,344 MW. While India holds 10 percent of the world's coal reserves, power firms often struggle to access local supplies due to environmental and land acquisition delays, forcing expensive imports.

Most new power projects -- dependent on imported coal -- have seen their costs jump in the past year due to the rise in global coal prices and a weakening of the rupee.

"If power companies have to sell power at lower rates when the cost of generation is going up substantially, it becomes difficult," M.V.S. Seshagiri Rao, chief financial officer of the steel and power-focused JSW Group, told the Summit.

"In the current scenario, power firms are at a disadvantage because of mismatch between cost and tariffs. That requires correction," he said, adding the group would only make further investments in the sector if it was assured of coal supplies.

Shares in India's biggest power firms have been battered this year, with the sector index .BSEPOWER shedding 37 percent since January, against a 22 percent fall in the benchmark index.

State-run power gear provider Bharat Heavy Electricals Ltd (BHEL.NS) has seen its shares lose 44 percent of their value.

Ratings agency CRISIL last month warned of stress in the power sector due to rising losses and high debt among state-run distribution firms. CRISIL estimated power distribution companies would need to raise tariffs by 47 percent just to break even in 2011/12.

"Unless we improve the health of the state electricity boards, the entire economic progress could come to a halt," Akhil Gupta, chairman of the Indian unit of U.S. private equity firm Blackstone Group (BX.N), which has almost $1 billion of investments in Indian power-related firms, told the Summit.

"Some states have not raised prices for 25 years. Imagine anything else in the world that has not changed in price for 25 years," he said.

($1 = 52.30 Indian rupees)

(Editing by Tony Munroe and Aradhana Aravindan)

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